April 12, 2013

In recent months, the state, school districts and many local governments have been basking in the warmth of a slightly improved economy and new revenues from voter-approved tax hikes.

They need to brace themselves. A fiscal cold front is on its way in the form of huge pension cost hikes.

The California Public Employees' Retirement System board is set to vote Tuesday on recommended accounting changes that would raise employer pension contribution rates by 20 percent on average over the next six years. Added to pension rate increases already scheduled, school districts and state and local governments could be hit with pension cost hikes of between 40 and 50 percent by 2020. For the state of California alone, pension contributions for state workers and non-teacher school employees would climb from $5.1 billion to $7.4 billion.

The city of Sacramento - which paid $60 million in pension contributions to CalPERS in 2012-13, $51 million of that from its general fund - is expecting to shell out tens of millions more annually by the time the new rate hike is fully phased in.

Despite the high cost, the change being recommended is fiscally prudent. To avoid severe rate increases after the 2008 recession, CalPERS employed a controversial accounting technique called smoothing. It spread the retirement fund's $100 billion recession-era losses over 15 years. To further soften the blow on government employers, CalPERS also reset the amortization period every year, which meant the losses were never fully paid off.

The new policy would shrink the smoothing period from 15 to five years and require the retirement fund to pay off the old losses and any new losses over a fixed 30-year period. While those changes require substantially higher contribution rates, they also reduce the very real danger that CalPERS' funding status could fall below 40 percent.

Should that happen, the retirement board would be forced to impose even sharper contribution rate increases on school districts and state and local governments. The alarming reality is that some local governments wouldn't be able to pay. The bankrupt cities of Stockton and San Bernardino are ever-present reminders of how badly local government finances can spiral out of control.

So the stark choices CalPERS and government employers face is pay a lot more now - or pay even more later.

Gov. Jerry Brown and lawmakers need to come off the warm cloud of thinking they solved the state's pension crisis with last year's modest reforms. More will be needed. Public employee unions that have steadfastly fought pension reform must recognize that their members' jobs will be at risk if governments start laying off workers to pay for increased CalPERS contributions.

To protect government workers, the public and taxpayers, additional pension reform is essential. One sensible reform - possibly the most equitable one - would allow current workers to keep the retirement benefits they have already earned but reduce future benefits to a lower and more affordable rate.

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